Around the Texas Capitol: Texas starts to reopen; outlook on state finances bleak

Texas continues to emerge from COVID-19 isolation and reopen for business. On May 18, Texas Gov. Greg Abbott announced the second phase of the State of Texas’ ongoing plan to safely and strategically open Texas while minimizing the spread of COVID-19.

However, certain counties experiencing surges in COVID-19 cases will have their beginning date of Phase II delayed until May 29. These counties include El Paso, Randall, Potter, Moore, and Deaf Smith. Surge Response Teams are actively working in these areas to increase testing, maintain hospital capacity, and ensure that COVID-19 is contained and mitigated.

For the rest of the state, under Phase II, restaurants may increase their occupancy to 50%, bars can open at 25% capacity, and additional services and activities that remained closed under Phase I may open with restricted occupancy levels and minimum standard health protocols laid out by the Texas Department of State Health Services (DSHS). Among the announced limited openings – more details are here – are:

May 31: Youth day and overnight camps, youth sports and certain professional sports without in-person spectators.

The governor also announced that public schools in Texas have the option to provide in-person summer school as soon as June 1 as long as they follow social distancing practices and health protocols laid out by DSHS.

During his remarks, the Governor also presented information on the state’s hospitalization and positivity rates—two metrics the Governor and his team of medical experts have used to inform the state’s ongoing plan to safely and strategically open. Details on these metrics can be found in presentation slides here and here.

On April 27, Abbott reopened restaurants, retail stores, museums, movie theaters, and other facilities on a limited basis under Phase 1. He expanded his order on May 5 to announce the opening, with restrictions of barber shops, beauty salons, tanning salons and some swimming pools on May 8, and gyms, manufacturer services and some workplaces, on May 18.

Abbott on May 12 issued a proclamation extending his Disaster Declaration for all Texas counties in response to COVID-19. Originally issued on March 13 and extended on April 12, the Disaster Declaration provides the state a number of resources to effectively serve Texans as the state continues to mitigate the spread of COVID-19.

As of May 18, Texas has reported 48,693 COVID-19 cases with 1,347 fatalities in 222 of its 254 counties. You can stay up-to-date on Texas’ COVID-19 statistics, including information by county, on the state’s COVID-19 dashboard.

COVID-19 impact seen on state and local sales tax, other tax collections

COVID-19’s devastating impact on state and local budgets is starting to become clear. On May 1, Comptroller Glenn Hegar reported that state sales tax revenue totaled $2.58 billion in April, 9.3% less than in April 2019, the steepest decline since January 2010.

In addition, local sales tax allocations sent to cities, counties, transit systems and special purpose taxing districts by Hegar totaled $824.1 million for May, 5% less than in May 2019.

Both figures are based on sales made in March and remitted to the agency in April. According to Hegar, widespread social distancing requirements were not in place across much of the state until late March, meaning the impact of those measures affected only a portion of sales tax remittances and local sales tax allocations for April.

Data set to be announced in early June likely will show steeper declines compared to a year ago, as the effects of both the shuttering of businesses related to COVID-19 and plummeting oil prices were manifest throughout April.

“State sales tax collections declined as a result of efforts to stem the spread of COVID-19 through business closures, crowd limits and stay-at-home orders adopted in the state, as well as a precipitous drop in worldwide demand for oil,” Hegar said. “The steepest declines in tax remittances were from businesses most quickly and dramatically affected by social distancing: restaurants, performing arts venues, movie theaters, theme parks and fitness centers, as well as department stores and boutique retail shops. However, those losses were, to a degree, offset by increases from big-box retailers, grocery stores and online vendors. Remittances from oil- and gas-related sectors also fell significantly as oil and gas exploration and production companies slashed capital spending in response to the crash in oil price.”

Sales tax is the largest source of state funding for the state budget, accounting for 57 percent of all tax collections.

The effects of the March economic slowdown and falling oil prices were more evident in other sources of revenue in April 2020. Texas collected the following revenue from other major taxes:

Motor vehicle sales and rental taxes — $164 million, down 45% from April 2019, the largest monthly drop on record in data going back to 1983;

Motor fuel taxes — $284 million, down 12% from April 2019, the steepest drop since 1991;

Natural gas production tax — $67 million, down 48 % from April 2019;

Oil production tax — $191 million, down 45% from April 2019;

Hotel occupancy tax — $24 million, down 63% from April 2019, the deepest drop in data going back to 1990;

Alcoholic beverage taxes — $57 million, down 55% from April 2019. Declines were driven by mixed beverage gross receipts and sales taxes, both of which were down more than 58%. Excise taxes on beer were up 16%from April 2019, while wine excise taxes were up 9% from April 2019.

CompTIA and TAM Interview With Comptroller Glenn Hegar

On April 22, CompTIA and Texas Association of Manufacturers hosted a Virtual Brown Bag Lunch featuring keynote speaker Comptroller Hegar. Below are highlights from the comptroller’s comments on how COVID-19 will impact state government and the state budget, plus a few other issues.

Economic Impact – According to Hegar, the Texas economy was humming in the first few months of the year with an increase of 50,000 jobs and sales tax revenue exceeding the previous years’ collection. But, in the beginning of March, Saudi Arabia and Russia began flooding the market with oil. That’s when he realized the state was in a recession, and he began talking in those terms. When COVID-19 arrived, it exacerbated the oil crisis, and the numbers really started to deteriorate. It is too soon to tell the magnitude of losses, but the numbers paint a grim picture.

State Budget Impact Still Unknown – Prior to COVID-19, the Comptroller predicted that the state’s current fiscal year would end with a surplus of over $2 billion along with approximately $10.2 billion in the Economic Stabilization Fund (Rainy Day Fund). He will issue revised revenue estimates in July and December, and he indicated that those numbers will be lower than previous estimates “by several billion dollars.” The next revised revenue estimate will not be issued until July because the true economic impact of COVID-19 will not be evident until June when retailers report April sales tax revenue and May tax reports start to roll in.

No Special Session Needed – Many – including some legislators – have wondered if a special legislative session to respond to the state’s economic downtown. Hegar is saying “no” for several reasons. First, no one will agree on anything in just 30 days. Second, it is not currently safe to bring legislators into close quarters in the Capitol. Third, the governor and the Legislative Budget Board have the necessary authority to address budget concerns, so cash flow can be managed in the interim. If the federal government allows CARE Act money to be spent on any expense, not just COVID-related expenses, that will free up a lot of money for other purposes. Fortunately, Texas is in a much better position than other states in many ways. Fiscally, Texas has a projected surplus and a healthy Rainy Day Fund. And, while other states are writing budgets in the midst of uncertainty, the Texas biennial budget cycle gives budget writers a bit of runway for economic data to roll in before making appropriations.

Taxpayers are Concerned About Their Ability to Pay Taxes – Many taxpayers, like restaurants, that have been affected by the shutdown have asked the comptroller if he could postpone tax due dates like he did after Hurricane Harvey. He is reluctant to do so because, unlike Harvey, this emergency has affected the entire state and every industry, making postponement much more difficult. Instead, he is encouraging businesses to call the Comptroller’s office to discuss options like deferred payment plans. He did postpone franchise tax remittance until July in accordance with the IRS. Appraisal districts have asked if they can use 2019 appraisal values, but the statute requires property to be appraised based on its value as of Jan. 1, 2020, so he has no flexibility on that front.

CARES Act Funding for Texas – Texas is expecting to receive $11.2 billion under the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act, but there are questions about how the money may be spent. Many states are asking if it can be spent on general “loss of revenue.” The money Texas receives will be split – 55% for the state and 45% for local entities. The Comptroller is trying to figure out how to distribute the money to local governments since many have overlapping services.